Why Foreign Portfolio Investors Are Selling Shares in India?

For the 11 straight day Foreign Portfolio Investors (FPIs) have net sold in the cash market in India. In fact on Thursday they net sold to the tune of a staggering Rs 3100 crores on Thursday. This kind of net sale figure we have not seen ever since the Narendra Modi government took charge at the centre.

Markets were closed on Friday and it would be interesting to see if they continue to press sales next week. Here is why they are selling in the Indian markets.

Worries Over MAT

FPIs are worries that they would have to pay Minimum Alternate Tax (MAT) with retrospective effect, though going forward from April 1, 2015, there would be no MAT that is applicable.

This issue between foreign investors and government cropped up last year when the tax department started sending notices to FIIs to cough up MAT.

These notices were based on a decision by Authority for Advance Ruling, which directed Castleton to pay MAT in India on their book profits.

So far, the government has sent MAT notices for over Rs 602 crore to 68 foreign investors. These notices have spooked foreign investors who have now sold heavily in the cash markets in India.

China More Attractive

The Chinese markets are much cheaper then the Indian markets and have given returns of a huge 35 per cent year to date. Indian markets have given negative returns this year. The real worry for FPIs is that in terms of valuations Indian markets are very expensive as compared to the Chinese markets. Indian Sensex stocks trade at a price to earnings multiple of 17 times one year forward earnings, while China trades at 13 times. The market cap of Chinese stocks is the second highest in the world making it a very liquid market when foreign funds want to sell. A lot of regulatory changes have also been beneficial for FIIs. Foreigners were last year allowed to buy Mainland A shares through the Hong Kong Stock Exchange. They are therefore dumping Indian stocks in favour of Chinese stocks.

There seems to be a gradual shift to the Chinese market if analysts are to be believed.

No Passage On Key Bills

There is hardly any progress on key bills and perhaps they remain worried on the outcome of the GST and Land Acquisition Bill. The Budget Session of Parliament would end on May 8 and there is very little time to pass these key bills.

Poor corporate results, poor monsoon forecast and a rise in crude prices could be other reasons why investors are dumping shares in India. It would be interesting to see what happens in the month of May.